Road to telecoms liberalization

Road to telecoms liberalization

By Winahyo Soekanto

DENPASAR (JP): Djamhari Sirat, who replaced Sasmito Dirdjo as
director general of telecommunications in late January, is facing
a great deal of homework in implementing the campaign to
liberalize the telecommunications industry.

The outgoing official was responsible for some of the earlier
liberalization measures, including the drawing up of Law No.
36/1999 on telecommunications, but much has yet to be done.

The new director general, who holds a PhD in microprocessor
application from a United States university, is an expert in
telecommunications technology and should thus be fully aware of
the imperative of consistent policies to attract investment.

The new director general must respond to the parallel rapid
growth of telecommunications and information technology and
increasing demands for independent, procompetition regulatory
bodies.

Telecommunications regulatory bodies in Singapore, Hong Kong
and Australia have been commended by telecommunications and
informatics industry players because of licensing policies that
favor transparency, regulations that also encourage competition,
and because of good services to the industry players.

The need for an independent regulatory body in Indonesia has
even been recognized by the International Monetary Fund in its
economic reform prescription for Indonesia.

The Directorate General for Post and telecommunications and
the Ministry of Transportation and Telecommunications, as the
state regulatory body, have displayed an intent to meet demands
for an independent regulatory body, but various problems are
hampering the campaign.

The liberalization process actually started in Indonesia in
1996 when state telecom company PT Telkom, as the incumbent
monopoly power in the industry, invited investments through joint
operation schemes (KSO), the construction of fixed lines and the
licensing of cellular operators.

Before the 1997 economic crisis, Indonesia was able to attract
the attention of investors to enter its telecommunications
industry. When the economic crash turned into a multidimensional
crisis, however, those investors pulled out.

Even so, the existing growth propelled by Telkom's KSO
projects and that maintained by the existing cellular operators
are a sign of how dynamic the industry is.

Of special note is the growth of prepaid services for cellular
telephone users to keep their costs under control, and which also
serves as the second line for the operator companies themselves.

Meanwhile, the government continues its struggle to build the
necessary legal infrastructure to keep up with the rapid
developments in the telecommunications industry, to make it more
liberal and open.

Law No. 36/1999 stipulates a one year transition period before
it goes into effect. The year passed without the government
having produced adequate directive guidelines; during that period
the regulations issued included Government Regulation No. 52/2000
on telecommunications management and No. 53/2000 on the use of
radio frequency spectrum and satellite orbits.

Many necessary regulations are yet to be legislated. One
cannot help but question whether our legislators drafting the
above law had not thought about the required accompanying
directives.

What regulations are still missing? This list is not
exhaustive but should give a general idea about the poor legal
infrastructure in our telecommunications industry: regulations on
new licensing for cellular operators and a review of existing
licensing procedures, on interconnection of networks, on tariffs,
on security of telecommunications and safety and privacy
measures.

Prolonged absence of such regulations would slow down reform
in this sector, given the speed with which the industry grows and
the technology develops.

Despite the crisis last year both PT Telkom and cellular
operators were still committed to expansion.

The government, the industry regulator, must race against time
and accommodate the companies' drive forward by drafting
favorable policies and regulations.

There are myriad ways by which the government could gradually
approach market liberalization. It could start with facilitating
competition in mobile telecommunications and value-added
services, before commencing with campaigns to promote competition
in basic services. South Africa chose this approach in 1994.

Other countries chose to introduce a "duopoly" in the sector,
before ushering in open competition: the UK took this route in
1982 before launching full domestic competition in 1991 and for
international services in 1996.

Some countries such as Switzerland applied monopoly before
jumping straight into full competition for all services.

Indonesia has made a step in the right direction by first
introducing competition in the mobile telecommunication industry;
it has also planned to end the monopoly of basic services in 2003
or 2004 and compensate the incumbent monopoly holder with mobile
cellular licensing and fixed-line services.

The accelerated pace with which the government is ending the
monopoly, however, is also causing a burden, such as indicated by
the termination of joint operating schemes between Telkom and its
partners.

This situation is adversely affecting the plan to restructure
Telkom, which is crucial for the industry's reform and
liberalization. The delayed restructuring of the monopoly holder
is also adversely affecting the flow of new investments.

Over the past few months PT Telkom has been insistent in its
campaign to acquire PT Indosat. Telkom officials and proponents
of the acquisition argued that once the value of the two
companies soared when the government launched its advance
privatization program, the state coffers would really get filled
up.

But Indosat has been fighting the notion tooth and nail,
launching every possible move to prevent merger including signing
new ventures, purchasing new businesses abroad, and planning to
issue bonds, which would all mean additional burdens for Telkom
should it succeed in its merger campaign.

Officials of both companies have also been intensifying
campaigns to garner support from various bodies including from
the House of Representatives.

What comes across to the public is that Telkom has been
neglecting its homework -- including the problem of termination
of joint operating schemes -- because it is too preoccupied with
the acquisition plan.

Telkom's above preoccupation possibly stems from a conviction
that a merger of Telkom and Indosat would solve a number of
problems concerning the joint operating schemes, some problems of
cross-ownership between the two companies, and would increase
their value for the government.

But many have also observed that the campaign was a sign of
Telkom's defense against losing its monopoly rights as well as
fears of free competition.

Yet Telkom's fears of losing out to competition are unfounded.
Its customer base of fixed lines consists of over seven million
customers inside and outside the joint operating schemes; it also
has shares in healthy companies such as Telkomsel, Lintas, Artha
and Satelindo.

Telkom is therefore most prepared for open competition with
anyone including its "stepsister" Indosat.

No less strange are the indecisive-sounding statements of the
Minister of Telecommunications. Had he been consistent with the
telecommunications industry's blueprint for development and with
Law No. 36/1999, he would have made it clear from the start that
a merger of Telkom and Indosat would be against their
procompetition policy.

One cannot help but wonder whether these institutions are the
right ones to liberalize the industry and encourage
procompetition.

The writer is a lawyer based in Denpasar and an observer of
the telecommunications industry.